RLJ Lodging Trust — 2018 Second-Quarter 10-Q
Reporting period: Three and six months ended June 30, 2018. RLJ is a lodging REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 156 hotels with approximately 30,400 rooms. The 2017 FelCor merger materially enlarged the portfolio; most year-over-year revenue growth reflects properties not present in the comparable 2017 period.
Financial performance
Amounts below are in millions, except per-share data and operating statistics.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $484.7 | $292.3 | $914.3 | $552.5 |
| Operating income | $89.1 | $58.1 | $137.1 | $94.8 |
| Net income | $64.4 | $42.5 | $88.3 | $64.2 |
| Net income attributable to common shareholders | $57.4 | $42.2 | $74.8 | $64.0 |
| Diluted earnings per common share | $0.33 | $0.34 | $0.43 | $0.51 |
| Operating cash flow | — | — | $195.8 | $141.5 |
| Capital improvements and additions | — | — | $85.0 | $39.2 |
For the 122 comparable hotels, Q2 occupancy was 82.0% versus 80.8%, ADR was $171.61 versus $171.28, and RevPAR rose 1.6% to $140.72. For the six-month period, occupancy was 78.5% versus 77.6%, ADR declined 0.6% to $168.14, and RevPAR increased 0.5% to $132.04. These same-property indicators provide a more informative view of underlying trends than consolidated revenue growth, which was driven largely by the FelCor acquisition.
Debt and liquidity
- Debt, net, was $2.57 billion at June 30, down from $2.88 billion at December 31, 2017. Cash and cash equivalents were $382.5 million; restricted cash reserves were $78.2 million, for combined cash and restricted reserves of $460.7 million.
- The $600 million revolver had $250 million drawn and $350 million of available capacity. RLJ reported compliance with its debt covenants.
- Interest expense was $25.4 million in Q2 and $54.1 million for the first half, versus $14.5 million and $28.9 million in the respective 2017 periods. The increases principally reflect debt assumed in the FelCor merger and revolver borrowings.
- Approximately $1.9 billion of debt was variable-rate before hedging; after swaps, $527 million, or 20.8% of total indebtedness, was exposed to variable rates. Management estimated a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $5.3 million.
Changes, outlook and notable items
- Consolidated revenue increased 65.8% in Q2 and 65.5% for the first half, while comparable-property RevPAR increased only 1.6% and 0.5%, respectively. RLJ attributed most revenue growth to non-comparable properties, including the 37 hotels acquired in the FelCor merger; the comparison also includes dispositions.
- Common diluted EPS fell from $0.34 to $0.33 in Q2 and from $0.51 to $0.43 for the first half. Preferred dividends introduced after the FelCor merger reduced income attributable to common shareholders. The reported first-half results also included a $7.7 million gain on early redemption of secured notes and a $2.9 million net loss on hotel sales.
- RLJ redeemed approximately $524 million principal of senior secured notes in March for about $539 million, including the redemption premium. It also extended two term loans originally due in 2019 to January 2023 and improved pricing. Two hotel sales during the first half generated approximately $117.1 million in net proceeds; two further properties, carried as held for sale at quarter-end, sold in July and August.
- Management was cautiously optimistic that economic and employment trends and tax reform could support lodging demand, but expected RevPAR growth to be moderate amid accelerating hotel supply. The filing provides no specific financial or operating guidance.
- Other items to monitor include $3.7 million of first-half unusual expenses for debt modification, executive transition, unreimbursed hurricane costs and activist-shareholder matters; a $4.8 million accrual related to a disputed pension withdrawal-liability/indemnification claim; and Wyndham management-fee reductions of $4.3 million year to date under minimum-income guarantees.
- Management stated that previously disclosed risk factors had not materially changed. Risks cited include lodging-market weakness, competition, interest rates and financing access, seasonality, natural disasters and broader economic or geopolitical disruption. Disclosure controls were judged effective.
Important facts for investors to verify
- How much of reported growth and operating income is attributable to the FelCor-acquired properties versus comparable hotel performance.
- Whether modest comparable RevPAR growth can offset labor, operating, property-tax and interest-cost increases.
- Debt maturities, refinancing or extension requirements, revolver availability, and exposure after interest-rate hedging.
- Completed sale proceeds and the effect of portfolio dispositions on future revenue and cash flow.
- Resolution and potential payment exposure from the pension-related claim, and the continuing costs associated with unusual corporate expenses.